Basic understanding of your Business Accounts

Your profit and loss account is a summary of the profit (or loss) that your business generates over a period of time. The normal period for this is a full year and this is used to prepare the information needed to submit a tax return for your business and/or for you personally.

Profit and loss accounts can also be prepared for shorter periods such as a month or a quarter and businesses who have access to this information should review it regularly so you can monitor sales, costs and profit trends.

A balance sheet is a list of the assets and liabilities of the business at a point in time, like a picture or snapshot of the business. It is usually produced at the same time as the profit and loss account i.e. it is usually as of the same date that the profit and loss period ends. So if a profit and loss is for the 12-month period ended on 31 December 2021, then a balance sheet would also be prepared as at 31 December 2021.

Not every business will have a balance sheet, nor will they need one for tax purposes, but they are available to you if you have a cloud based bookkeeping system.

It is useful to help you track the “net worth” of your business, which will grow as you generate and retain (rather than withdraw) your profits.

You will have debtors if you generate invoices for your products or services and you haven’t been paid yet for them. The debtors figure will appear in your balance sheet and will represent the total of any unpaid invoices as at the balance sheet date.

It is useful keeping an eye on this figure to ensure that your customers are paying you promptly. If they aren’t, then you should send out reminders or statements to ensure that monies owed to you is kept under control.

Creditors are monies that you owe and will also appear on the balance sheet. This will include monies owed by the business for supplies or stock or raw materials if you are using it to make or manufacture something in your business for resale.

You should also track this figure to ensure that you settle your own creditor invoices on a timely basis.

Fixed assets are those longer-term purchases that are owned by the business and are generally likely to last longer than one year e.g. property, vehicles, machinery, equipment including laptops and computers.

If you purchase a fixed asset for your business, it is not treated as an expense in your profit and loss account for tax purposes but instead you can avail of capital allowances that work in the same way to provide you with a deductible cost. Speak to your accountant for more information.

Current assets are those shorter-term assets that are usually used up within a 12-month period such as stock, work in progress, raw materials and also includes debtors and cash in the bank.

Current liabilities are those to whom you owe money, and you will be expected to pay within the next 12 months. It will include trade creditors and any short-term lending such as overdrafts and loans payable within 12 months.

Working capital as a term that is often bandied around and essentially it refers to the difference between your current assets and current liabilities. Where you have a positive working capital, that is usually a sign of better health i.e. where your current assets are greater than your liabilities.

It is good practice to periodically review your trading information and this should be done at least quarterly. As stated above, it is generally not possible to have good, accurate trading information without a cloud-based bookkeeping system.

Generally the key information you would review will be your Profit & Loss account – checking for trends and comparing it to the previous period. You should also check your aged debtors and creditors listings (if relevant to your business) to ensure that you are getting paid on time and that you are paying your own bills on time.